Should the Fed be driving interest rates down now? Trump says yes; I say maybe

Trump's appraisal of Jay Powell when he nominated him to be Chair of the Federal Reserve Board of Governors:
"That is why we need strong, sound, and steady [pause] leadership, at the United States Federal Reserve. I have nominated Jay to be our next Federal Chairman. [pause] And so important, because he will provide exactly that type of leadership. He's strong. He's committed. He's smart. And, if he is confirmed by the Senate, Jay will put his considerable talents to work, leading our nation's independent central bank. Jay has learned the respect and admiration of his colleagues for his hard work, expertise, and judgment. Based on his record, I am confident Jay has the wisdom and leadership to guide our economy through any challenges that our great economy may face..."

Trump's appraisal of him now:
"Our Economy is very strong, despite the horrendous lack of vision by Jay Powell and the Fed, but the Democrats are trying to “will” the Economy to be bad for purposes of the 2020 Election. Very Selfish! Our dollar is so strong that it is sadly hurting other parts of the world.* The Fed Rate, over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well. If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced-good for everyone!.."
https://www.bradford-delong.com/…/donald-trump-that-is-why-…

My own take (keeping in mind that monetary policy is not something in which I have any deep expertise) is that Powell has done a better job than I expected, but that we may be at a point at which some cuts in the interest rates that the Fed controls are probably warranted. How can the Fed do this? Well, it would have to buy existing (presumably short-term) bonds--like 30-day US government bills; the interest rate on those is currently about 1.91% (annual basis). Driving the rate on 30-day Treasury bills down to 0.9% would have a spillover on other interest rates, which could be expected to fall as well, probably by less than 100 basis points (1 percentage point). So borrowing becomes cheaper, and, presumably, there would be some increase in purchases typically made on credit.

But the effect depends on the extent to which *other interest rates* fall when the Fed forces the T-Bill rate down. So, for kicks, I looked at the relationship, since 2008, between the 30-month T-Bill rate and the interest rate on 48-month car loans. It look like driving the T-Bill rate down from its current 1.91% to 0.02% would push the car loan rate down from about 4.75% to about 4%, or, on a $30,000 car loan, the monthly payment down from about $690 to about $677--a 2% reduction in the monthly payment. Frankly, that's unlikely to provide a strong incentive for more car purchases. (And similarly for other types of consumer loans.

The point, really, is that even if the Fed cuts interest rate to essentially zero, it's likely to have a fairly small impact on consumer behavior. The Fed should probably cut rates some, but, because it has so little room for maneuver, it won't make much difference in the short run.

(DISCLAIMER: MY ESTIMATE OF THE EFFECT OF A RATE CUT ON CAR SALES MAY WELL BE SERIOUSLY WRONG.)

(Incidentally, a 100-basis point reduction in the interest rate that the Fed actually directly controls--the Federal Funds rate--is currently 0.12% (annual rate)--would mean a Fed Funds rate of -0.88% (per year). The Fed Funds rate, by the way, is "The interest rate at which banks and other depository institutions lend money to each other, usually on an overnight basis." So if Bank A wants to borrow $100 million overnight from Bank B, Bank B would actually *PAY BANK A* about $2400 (again, for an overnight loan)--Bank B would be repaid LESS than the $100 million that it lent. Cutting the Fed Funds rate by 100 basis points would make Bakn A a lot more willing to borrow--but what other bank would be willing to lend?)

*I gotta comment on this. A "strong" dollar means it takes more euros or remnibi of pounds or Australian dollars or Canadian dollars of pesos to buy a dollar. So those countries will react by buying less stuff from the US because it has become more expensive. But a "strong" dollar also means that the US can buy more euros (and so on) for a dollar. Wo we will react by buying more of the stuff people in other countries produce. It's arguable, then, that a "strong" dollar actually helps other countries' economies...that they have no particular desire to see the dollar "weaken."

In which I suggest that Jared Bernstein got some things wrong.

This was written by an economist whose work I generally find worthwhile.
https://www.vox.com/2019/8/16/20807099/trump-tariffs-china-trade-policy-democrats
But see if you can determine what's wrong with this:

"For example, about a decade ago, the Obama administration placed a tariff on a specific grade of Chinese tire exports, which our Commerce Department believed were being sold here as much as 200 percent below their normal market value."

I'm sure you all got this one right. Assume the normal value of those tires was $75. To sell then to us for 200% below their normal value would be...let's see...200% of $75 is $150...so they were selling them for -$75? PAYING us $75 per tire to take them?

You know what he meant? He meant that the normal market value was 200%--2 times-- as much as they were being sold for. So the normal market value of those tires would have been $150 and they would have sold, or course, for $75...If say "At 50% below their normal value," it's not as dramatic as saying "At 200% below their normal market value.\

Am I picking nits? I don't think so...And then there’s more:

"Another problem with Trump’s current approach is that its goal is balanced trade."

The real problem AS TRUMP SEES IT is not balanced vs. unbalanced trade, it's RUNNING A TRADE DEFICIT WITH A SPECIFIC COUNTRY. That is, Trump believes (or seems to believe) that trade between the US and China should result in either balance--our exports to China are equal in value to our imports from China--of in a trade surplus for us. But bi-lateral trade balances are all but meaningless. I would guarantee you that China has bilateral trade deficits with some countries. And that the US has bilateral trade surpluses with some countries.

AND Bernstein is wrong (in my judgment, although trade economics is not one of my specialties) in saying that the goal is an overall balance--value of exports equals value of imports across all the countries that we trade with.[1] For most of the 19th century, the US ran export SURPLUSES, mostly because we were (particularly relative to Europe) a developing country. And a lot of developing countries run export surpluses. And China is still (relatively speaking) a developing country. And the US is not.[2] He's also wrong in saying "On the other side, globalization’s cheerleaders...view trade deficits as always benign." Even globalization's "cheerleaders" would answer, if asked whether persistent trade deficits or trade surpluses are "benign" or "problematic" would answer, "It depends." (Which is almost always the correct answer in economics.)

[1] GLOBALLY, the value of exports equals the value of imports, because we don't currently trade with any other planets. Just wait...

[2] According to the CIA's "fact book", [ the US ranks 19th globally in GDP per capita, mostly behind a group of small countries, like Liechtenstein, Bermuda, the Isle of Man, and some larger economies, like Singapore and Ireland. China is 108th, just ahead of Brazil.
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html

Too Many People Have Died

[In which I write to two senators (Todd Young and Mike Braun) and one member of Congress (Susan Brooks).  I expect nothing from any of them.]

It has been another week of deaths.  Deaths that almost certainly would not have occurred—but for the fact that almost anyone can legally obtain weapons for which the only use is to kill people. 

It has been another year of such deaths.  According to the Gun Violence Archive (https://www.gunviolencearchive.org/), there have been 251 mass shootings in the first 216 days of this year—an average of more than one per day.  And in just the last two days, 29 people have been killed.  


We allow almost anyone to buy weapons that are designed for one purpose—to kill people—with little apparent concern for the consequences.  We do not effectively regulate the manufacture of those weapons, or of the ammunition used in those weapons.  We do not effectively regulate the sale of such weapons, in large part because of the ease with which private sales escape any sort of regulation.  And what regulations that do exist vary significantly from state to state, meaning that, in practice, restrictions on gun sales are no stronger than the weakest state regulation.

Many states (42, according to the Gifford Law Center to Prevent Gun Violence: https://lawcenter.giffords.org/gun-laws/policy-areas/guns-in-public/open-carry/) permit the open carry of handguns and/or long guns.  Every state permits the concealed carry of handguns (in 35 states, a concealed carry permit is required: https://lawcenter.giffords.org/gun-laws/policy-areas/guns-in-public/concealed-carry/).  And there do not appear to be any significant requirements for training in the use of these weapons.


Indiana, for example,
--Does not require a permit to purchase , handguns or long guns
--Does not require registration of long guns of hand guns
--Does not require any license for the possession of long guns or hand guns
--Places no restrictions on the possession of assault weapons
--Places no restrictions on magazine size
--Does not require a license for the carry of a long gun
--Does require a license for the carry of a hand gun
--Does allow concealed carry of a handgun (but not a long gun) on college campuses
--Does not allow local jurisdictions to enact stricter laws
--Does not require background checks
https://en.wikipedia.org/wiki/Gun_laws_in_Indiana

In short, Indiana places essentially no restrictions purchase or ownership, or on the types of weapons that many be acquired.


Texas laws—which I mention because of the recent mass killing in El Paso—are apparently almost identical.


The consequences of the lack of regulations of the ownership pf firearms in the United States is quite clear.  Deaths from the use of firearms, both suicides and killings of others, occur at a much higher rate than in other countries (aside from those in which there are wars or armed insurrections in progress).  Mass killings occur frequently in the U.S. but rarely elsewhere.  Any yet Congress does not act.  How many deaths, how many permanently disabling injuries are too many before Congress acts?  Bob Dylan wrote a song more than 40 years ago in which he asked “how many deaths will it take ‘til we know that too many people have died?”  He said that the answer was blowing in the wind.  That was not good enough then, and it’s not good enough now.  Too many people have died.  This year, and this week.  It is time for Congress to act.  It is time for you to act.